It’s easy to poke fun at David Einhorn. The star fund manager turned poker player turned bubble-stock-shorter has had a torrid ten years in markets, following his rise to financial fame during the post dotcom crash, and his Lehman Brothers short.
Despite the poor recent returns at his fund Greenlight Capital, however, FT Alphaville remains interested in the investor. Not least because his book Fooling Some Of The People All Of The Time is one of the best yarns on stock selection out there, in part because it does an excellent job of explaining the kind of mentality that is required to have and hold onto positions in the market, alongside the usual waffle about valuation metrics and whatnot.
So when one of Einhorn’s comments on value investing from Simplify ETF’s event at the New York Stock Exchange on Monday started circulating on Twitter, we thought it was worth flagging. Particularly as it drew on some themes we’ve touched on in markets over the past year. (And Lord knows, we love some intellectual re-enforcement every now and then!)
Here’s the blurb in question (h/t to Cundhill Capital for sharing):
We were long a retailer called Dillard’s for a number of years. It’s not a great business, but they make some money and they own all of their real estate and it’s pretty unlevered and they were buying back stock. And pretty much you had the employees own the stock and the family own the stock and you got to the point where there’s pretty much no stock left and they really kind of bought it all back and after years and years of the stock underperforming, suddenly it went up 600 per cent. And that is the kind of thing that can happen to some of these other companies that are going to buy back 15, 20, 25 per cent of their stock for the next two or three or four years. Eventually there’s going to be so few shares left and the index funds will have given up or whatnot. And then you’ll have a rerating. The thing is, you just don’t know when that’s going to happen. It’s a $200 a share today or something close to that, it was $60 before COVID, and it was $30 at the bottom of COVID, so it’s more than tripled since then. Their business isn’t materially different or better than it was, but it was probably undervalued by 3x when it was hated pre-COVID because there were very few shares outstanding than had been reduced consistently over time, and there were still some sales and some profits. And, you know, I think the stock probably just got over done.
There’s a lot of nihilism out there. Some people think they’re being more practical than others. What I mean by that is people say this is where we are right now and so these are the kinds of things that you need to own and they will go up and you should own them. I have trouble with it because I don’t really understand why they’re good investments. And they’ve done much better than I’ve done, because they’ve owned things that should be owned right now.
The way I look at it now is there’s an off chance that owning a share of stock still represents a proportional ownership in the cash flows and profits of that company. And on that off chance, I’m positioned to do very well if that proves to be the case.
Einhorn’s playing all the hits here. But one point we thought we’d build on is the idea that once a company has bought back quite so many of its own shares, that will naturally induce a squeeze, as there are no more incremental sellers of the stock.
We looked up department store chain Dillard’s share price and share count over the past five years, and Einhorn seems to be right on the money.
First, here’s its share count between 2005 and 2020:
Just the 70 per cent reduction in shares outstanding there! In case you’re wondering, the effect on earnings per share from Dillard’s eating itself has been pretty extreme. Its 2005 earnings per share figure of $1.41 would have been worth $5.18 using 2020’s share count. Talk about the denominator effect in action.
And, for context, here’s how its share price looks over the past decade:
FT Alphaville doesn’t want to get into the habit of providing comfort to value investors, but if anything will lift the spirits of those who have been patiently buying cash-flow generative stocks on the cheap with little-to-no-reward it’ss surely the chart above. The problem seems to be knowing when the market will eventually wake up, and whether you can hold out until then.
Related Links:
David Einhorn, in search of lost time — FT Alphaville
David Einhorn’s market nihilism
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